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Archive for November 21st, 2010

Let me introduce you to Caroline Atkinson. She’s the press spokesperson for the IMF. For fans of the TV show “The West Wing” based in a building just up the road from the IMF in Washington, she’s CJ with a British accent though her biography claims she’s a US national. We’re likely to be hearing a lot from her in the future as she helps the world understand what the IMF is doing here in Ireland. She’s a new face in our national life. This entry is about some other new aspects to life brought about by the IMF’s intervention.

1. Introduction
2. Timeline for Greek intervention, will ours be similar?
3. “Conditionality”
4. Glossary
5. The speech An Taoiseach should be making

1. Introduction
These are indeed momentous days. Next week, the characteristics of life in the State for the next four years will be mapped out in some detail (at least to the very great extent that State impacts upon our lives). And of course it is difficult to ignore our guests from the IMF. I bet that many of you didn’t know that there are three stages to IMF intervention – technical discussions, program discussions and then monitoring. Stage 1 is “technical discussions” where the 10-12 man team in our case from the IMF lift up the bonnet to assess the reality of our problems and that stage is likely to end during the forthcoming week. Technical discussions can involve discussions with politicians but from the IMF’s viewpoint they are fact finding. After the technical discussions, and only if requested to by the State, then the IMF will start stage 2 – “program discussions” (also known as a “negotiation mission”) which involve negotiating a deal – basically how much will they lend and what conditions will be attached. Program discussions might involve a different team from the IMF and to emphasise, the IMF say they will only enter into program discussions when the State makes a request for funding. It is an awful indictment of our political system that neither government nor Opposition has addressed the nation on the process involved in IMF intervention and at what point there will be oversight and commitment. As a nation becomes distressed that a deal will be done with an external party without public debate or even political oversight, all of our politicians have failed us in not clarifying how an event of generational proportions will impact our lives. In recent days I have looked at our Constitution for the first time in years and it seems to have been a founding principle that major financial commitments made by the State were to be subjected to parliamentary oversight. And yet I understand that Brian Lenihan to have told Reuters this week that “borrowing” does not require parliamentary oversight. The third IMF stage is the “monitoring mission” which is periodic review that whatever agreement on the State’s side is adhered to.

The presence of the EU complicates the process because there will be policy areas where the instincts of the IMF and EU might diverge. Corporation tax rates is one. Plainly many of our larger European neighbours are troubled by our 12.5% corporation tax rate and it seems as our present difficulties are being used in part as a vehicle to bring our CT rate back on the negotiating table. The IMF have tended to lower CT rates in past interventions and from my research I can’t find a single instance where they raised rates though I could be corrected on that. It should be noted that the IMF is controlled by its 186 members but larger countries have more voting rights – in fact the UK, France, Germany, Belgium, Italy and the Netherlands control some 24% of IMF votes.

2. Timeline for Greek intervention, will ours be similar?
Earlier this year Greece underwent the procedures now being played out in Ireland. The Greek intervention was worth €110bn, payable in tranches, with a total of €80bn from the EU and €30bn from the IMF. The Greek intervention was taking place at a time when new procedures and models were being developed like the European Financial Stability Fund (EFSF) and the concept of the IMF rescuing a Eurozone member – the Irish intervention is likely to be more straightforward.

Here was the timeline for the Greek bailout (no two interventions will be the same but the Greek one did have both IMF and EU involvement and is a euro country, its main problem wasn’t the banks but are fiscal)

12th January, 2010 The IMF arrive in Athens for “technical discussions”. “We have invited them to help us with their technical know-how, notably for the reform that we have launched to draft the budget,” and “A loan is not being discussed” said the government – sound familiar? In Greece a major problem was that statistics were not accurately collated or reported. I don’t think we have such problems but we do have banks that seem to have been less than open in disclosing losses.

22nd April, 2010 Managing Director of the IMF, Dominic Strauss-Kahn, states that the IMF has been involved with Greece “for months” and that in April they were “negotiating” and that “until now, we [the IMF] are not involved in the discussion with the Greek authorities but providing some technical assistance, which had been asked by the Greeks for months and we provided”

23rd April, 2010 The IMF MD issued a press statement in which he said the IMF had received a “request for a Stand-By Arrangement. We have been working closely with the Greek authorities for some weeks on technical assistance, and have had a mission on the ground in Athens for a few days working with the authorities and the European Union. We are prepared to move expeditiously on this request” So in this case the IMF seemed to be saying one day that it was engaged in negotiations and the next that they had received a funding request – this seems like putting the cart in front of the horse according to how the IMF is supposed to operate.

24th April 2010 The IMF MD held a press conference in which he stated that negotiations for the aid package were ongoing. So at least this is consistent with a sovereign request being followed by negotiations. It still isn’t clear why negotiations were ongoing before the request was made.

25th April 2010 The Greek Finance Minister in Washington gives a press conference in which he states that “negotiations” were ongoing prior to making the request on 23rd April, 2010 though the “actual negotiation process started only a few days ago” and that “these negotiations take weeks”

2nd May, 2010 Our new friend Olli Rehn and the IMF MD announce the deal “agreed in outline” – €110bn in return for an agreed implementation plan in Greece

6/7th May, 2010 Greek parliament debates, votes on and approves terms for the bailout.

9th May, 2010 The IMF announce that its board has agreed to the contribution of the IMF (€30bn)

12-18th May First tranche of €20bn paid to Greece (€14.5bn from EU and €5.5bn from the IMF)

14-17th June 2010, later deferred to 26 July 2010 – 5 August, 2010. First review by the EU, ECB and IMF. Yes these folks seem to keep close watch that countries implement the reforms they signed up to.

10th September, 2010 Second tranche payment of €9bn (€2.5bn from the IMF and €6.5bn from the EFSF) of funds by the IMF following the first review. Yes they wanted to see Greece implementing the agreed reforms before parting with more spondoolicks.

17th November, 2010 Austria suggested it may not pay its share of the next tranche of the Greek bailout because of dissatisfaction with the pace of reforms.

So far Greece has received €29bn at an average rate of 5%. It’s 10-year bond is presently trading at 11.56% midpoint (pretty much unchanged since its peak in May 2010), compared with Ireland’s at 8.12%. Greece says it won’t default on its debt. The markets disagree.

3. “Conditionality”
Here’s a new word that we’ll need get used to – “conditionality”. It’s the noun which describes the framework of conditions that the IMF will set in order for us to receive funding. And from research of their interventions elsewhere these are the areas likely to be considered in return for a loan. No particular order and there are some additional conditions suggested by the posturing of our neighbours in the rest of Europe.

(1) State sell-offs/privatizations
(2) Cutting public sector pay including the judiciary’s
(3) Cutting public sector pensions
(4) Property taxes
(5) Water rates
(6) Cutting the minimum wage
(7) Public sector reforms, cutting the number of TDs
(8) Increasing the income tax net to include lower paid
(9) Increasing VAT
(10) Increasing the Corporation Tax rate
(11) Excise taxes on fuel, cigarettes and alcohol
(12) Cuts to social assistance/unemployment benefit
(13) Cuts to the state pension
(14) Curtailing early retirement
(15) Raising the retirement age
(16) Redundancies in the public sector
(17) New taxes/levies
(18) A temporary levy on company profits
(19) Changes to the way in which economics statistics are collected
(20) Anti-corruption measures and a tightening up of corporate governance
(21) Restructure and sale of banks
(22) Cutting bureaucracy in the business
(23) Increasing regulation for the banks

4. Glossary
“technical discussions” – Stage 1 of IMF Intervention. The IMF try to get at the facts and understand the problems
“program discussions” – Stage 2, following a formal request for funding from the State, this is the negotiation of any loan agreement. Also known as the negotiation mission.
“monitoring mission” – Stage 3, once a loan agreement is operating the IMF return to make sure we’re complying with the terms
conditionality” – the terms under which the IMF grant the loans, the reforms and changes required from the borrower to see continued IMF support

5. The speech An Taoiseach should be making to the nation
“1. There have been ongoing discussions with the IMF for some time. Remember we have been members of the IMF since 1957 and there are regular reviews of our country, the last was in June 2010. Last month Minister Lenihan visited the IMF in Washington and discussed the challenges facing the State and of course there was some discussion of our financing needs and an intervention by the IMF.

2. The reason we have played down any intervention by the IMF was to minimize alarm and distress. IMF intervention makes people nervous about the future of our State – lenders, society, investors, MNCs. We don’t want to unnecessarily worry any of these groups unless we have to.

3. When the IMF arrived this past week, I should have addressed the nation and  explained why they were here, what they were doing and how any future intervention might work.

4. There are three stages to an IMF intervention (a) technical discussions where the IMF try to establish the problems and get at the facts (b) if the State makes a request for funding then we will have program negotiations where we negotiate a loan agreement and (c) if we do get a loan we will have regular monitoring missions where the IMF come back to make sure we’re complying with the terms of the loan. We are still at the first stage. I expect we will make a request for funding in the coming days and then we will have stage (b) for a few days.

5. Minister Lenihan will lead any negotiations. I am not going to tell you if the State makes a formal request for funding. Once any deal has been hammered out it will be brought before the Dail to be debated and agreed. The debate will be guillotined which is a great shame because this is the time that we should be bringing as much expertise and knowledge to bear on all options (including default) because whatever decisions are made now will affect us for the forthcoming decade (at least).

6. We are fully funded for day-to-day operation of the State until the middle of next year. However we face three serious challenges at the banks (a) losses are likely to rise even further or at the very least there is concern that they will (b) no-one including the ECB is lending to the banks and (c) we had previously parked the majority of funding of the bank bailout, €31bn, with the issue of promissory notes – it looks like we will need to start funding these now and in substantial sums which we don’t have.

7. There were supposed to be two main differences between Ireland and Greece (a) Greece lied about its financial condition and (b) Greece needed to redeem bonds in May 2010 so its funding needs were urgent. In fact these differences are superficial because (a) the figures for our banks are every bit as dodgy as Greece’s figures for its economy and (b) we need fund our banks NOW

8. I personally will welcome IMF intervention because it will allow the State to implement reforms which we could never have achieved given the gombeen nature of our politics. I probably won’t be the fifth best paid Taoiseach in the world but that’s nothing compared to the redundancies and pay/pension cuts that will be enforced in the public sector.

9. Even after receiving aid from the IMF our borrowing costs may remain at an elevated level for some time because of fears that we will ultimately need default on our lending. Although we use the word “manageable” we don’t actually know the point beyond which our debts would be unmanageable but we are getting to that point. Discussing default, even partial default, will only upset our stakeholders more but it is an option that will need be explored.

10. I will try my best to re-base ordinary living costs in the State so that reduced pay/pensions/social welfare will see corresponding cuts in food, communication, energy, clothes, household goods. I don’t have a great record in this area but I will try my best.

11. It is true that we will lose a chunk of our sovereignty with any IMF intervention. And the loss of sovereignty is materially different to that which we cede to the EU and other international organizations because we will be trading sovereignty for money and the only way we can extract ourselves from the arrangement is repayment over many years or default.

12. I am deeply sorry and ashamed that we have arrived at this point. I can blame others for contributing to our fall but I accept that as a senior member and then head of the government that I must ultimately accept responsibility for our present position.”

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